This week’s market drop may have caught your attention, if you would like to learn more about how this investment process could benefit you, contact Calandra Financial Group…

Here at FormulaFolios we’re having a great year of firm growth. As a result, we have many new clients that are getting their first experience with our investment philosophy.

Any time you’re doing something new with your portfolio, it’s perfectly natural to pay special attention, and even feel a little bit anxious. Especially if the first month is less than you expected. For many of our new clients, this might be exactly how you feel. And it’s okay, we completely understand!

The Past 6 Years Have Been Great

The past few years have been very good to investors, with many growth oriented asset classes up more than 100%. There has been minimal volatility too, with the largest drawdowns in US Stocks mostly less than 5%. This has probably gotten a lot of us to forget what a real correction feels like – as it is fairly normal for US Stocks to have intra-year drawdowns greater than 10%.

The past 30 days have been interesting. Stocks have mostly been flat to slightly down, with every few percent rally seeming to be followed by a few percent drawdown. Bonds have also been down, real estate down a lot, as well as non-US stocks. In a nutshell, every major asset class is either flat, slightly down, or down a few percent.

As this relates to FormulaFolios, we believe in following non-emotional formulas to help us make sound investment decisions. Part of our formulaic process is using well defined asset allocation for each client. This ensures we properly spread risk amongst many asset classes, while emphasizing the asset classes our models calculate to be the most desirable for current market conditions.

It’s a sound philosophy that has served us well for many years. But, it’s not without flaws and certainly doesn’t mean we’ll avoid all short term market downturns.

Case in point would be the last 30 days.

There’s More to the Market than Just the Dow and S&P 500

Below is a chart that shows my (Jason Wenk – FormulaFolios Chief Investment Strategist) SEP IRA. This is invested in what we call an MM80 portfolio. The MM80 invests 80% for growth and 20% for income (hence the 80), and uses Multiple Managers (hence the MM) in the allocation. Since I’m 20+ years from retirement and have a moderately aggressive personal risk tolerance, I feel it’s appropriate for my financial goals.

Along with the last 30 days of performance for my personal investment account, I’ve also mapped the results of quite a few major investment asset classes. This helps us see visually how my account compares to the general volatility of financial markets.

For those not familiar with all the market proxies in my chart, this might help a little:

– Orange represents Small Cap US Stocks

– Yellow represents the Total Bond Market

– Green represents International Stocks

– Light Blue represents Commodities

– Dark Blue represents Real Estate

– Pink represents the S&P 500 (Large Cap US Stocks)

When we look at how all these market proxies have done over the past 30 days, we realize that our portfolios are doing just fine. We’re behind just Large Cap US Stocks and the Total Bond Market, but equal or better than all other major asset classes. Since my particular account is down just less than 2%, I’m not worried at all.

Avoid the Big Drops, Ride Through the Small Ones

FormulaFolios are designed to help us avoid “The Big” losses, not necessarily the small ones. A 2% decline isn’t fun, but it’s a far cry from losing 10%, 20%, or more. As investors, we always need to do our best to remain emotionally strong, in spite of the natural fears we experience when it comes to seeing the value of our money go down (even if just a small percentage).

This patience is really important to investor’s long term success because more often than not, small losses are recovered easily by patient investors. In just the past 12 months, for example, the S&P 500 has dropped 2% or more 9 times (including twice in the past 30 days). Over that 12 month time period the S&P 500 is up approximately 12%, and has reached a new all time high 8 times after these 2% or greater declines.

When our models see major market risk on the horizon they’re designed to move to safer asset classes. It’s not always a perfect science, and no investment model can guarantee against experiencing some risk. At this time the models are cautious about the future, with many parts already moving to more defensive asset classes. Overall though, a few percent correction after years of booming markets, is perfectly natural and nothing to panic about.

Hopefully this post helps all our clients and friends, and especially helps those that are new to our firm feel confident and comfortable with your decision.

This article will be featured in an upcoming issue of Fortune Magazine!

As we cruise into the second half of the second decade of the new millennium, American investors in or approaching retirement, find themselves in a pickle. The real threat of future inflation and a faulty economy with a bubble in the markets, will make it increasingly difficult for this generation to live out their freedom years with peace of mind.

In working with clients, the question that should be on everyone’s mind and should be asked of all financial advisors, is “what are you doing to protect my money”. Why are the so called financial professionals telling clients to “hang in there”… “buy this hot fund or that hot fund”. How quickly we forget. We are only a handful of years past the financial crisis that sank markets by nearly 50%. The Great Recession and crisis is behind us, but the slow abnormal economy is lingering. But the stock market, oh no, that is all good. The individual investor has come roaring back and is making money again. Beware! Is the market going to go up forever? Is volatility going to remain low and confidence high forever? NO! The easy money policy of the Fed and the massive quantitative easing programs have put equity prices on a rocket. And the average retiree is falling for the Wall Street lure with no regard to potential consequences.

4 Ideas to Grow and Protect Your Nest Egg

Make steady performance your goal. The goal to investing for retirement should be steady, long-term growth with minimal disruption to a smooth existence. The process of the professional money manager is vastly different than the individual investor when pursuing this goal. The professional automatically makes smart decisions by using a mechanical, rules based approach. The professional know, through experience, that emotion must be avoided.

Use active management and true diversification. It has been proven, time and again, that asset allocation creates investing performance. True diversification does not mean owning 20-25 different mutual funds. It is also not owning 15 stocks instead of 3. Successful diversification is created with a focus on asset class management. Simply, use your mechanical, rules based approach to be in strong asset classes, while avoiding weak asset classes. Active management implies a rebalance when necessary and the avoidance of the “just hang in there” buy and hold mantra. Strive to be active with minimal trading, by managing the asset class mix. The asset class mix should be developed using multiple world-class, institutional style money managers.

Keep it simple. It seems that over the decades the Wall Street Gang has intentionally made the investing landscape more difficult. Retirement investing and accumulation of wealth are simple. It is just not easy. There is a difference. Building a solid investment strategy, at any age, needs to be simple. In a properly built portfolio, with a goal of steady performance, that is truly diversified, need only have 10-20 holdings. Adding more funds, or stocks, or ETFs does not necessarily improve performance and it is certainly not simple. If you keep it simple you will be able to answer two simple questions at any time: 1). What do I have? And 2). How am I doing? In fact, we all live in the technology age and you can implement several automated tools to give you 24/7 information about your financial life.

Keep costs low (fair). As consumers, we all want good value. I hate being overcharged for anything. But, I also appreciate and want the highest quality, for the fairest price I can find in the marketplace. No matter if you utilize the services of a professional advisor or you do it yourself, you must keep an eye on cost. Competition is fierce and in many instances, the absolute lowest cost may not be the best value. Keep costs fair and expect high value.

So, how well are you doing in these key areas? I know it’s a very forward question, but the truth is many investors are not doing well at all. Sure, the market is roaring and everyone feels elated and excited when they open their account statement. Be careful here.

One tool that we use in our practice is the revolutionary monitoring software, called AssetLock. You probably have not heard of it, as only a select few independent advisory firms across the country have licenses to use it. AssetLock is a proprietary monitoring system that places a floor under your account values and moves higher as your account reaches every new high level. For example, you don’t want, nor can you, afford to lose more the 10% in your IRA. Establish your AssetLock Value 10% below your deposit amount. As the account grows, the value goes up, just like the account value. Thus, protecting gains each and every day. This is not a stop loss or hedging strategy. It is a stop losing strategy, a tool that keeps you emotionally strong by allowing you the peace of mind that a major downward move in the market will not wipe out years of gains.

Get serious about growing and protecting your assets. You worked hard and earned the money, now look for smart ways to keep it.

In my last blog post I wrote about diversification and how most individual investors and retail financial advisors and stockbrokers get it WRONG! I apologize if I upset some of you. And to the advisors that follow me, you should be ashamed of your “strip mall” firm or Wall Street master that has made you their puppet. (If you missed my previous post, please click here)

Let’s continue your lesson on diversification and asset allocation. Diversification is a common investing idea people like to say makes sense but few actually practice. Many financial advisors, working for the big Wall Street firms, also claim to provide diversification, but do not. That is a shame; because it is a powerful investing tool and you, the investor, deserve it.

What is true diversification? Let’s first explore what it is not:

It is NOT owning a broad ETF or two as a “base” for your portfolio.

It is NOT owning seven different mutual funds that track sectors of the stock market.

It is NOT holding stocks and letting cash dividends build up before buying more.

It is NOT owning 15-20 stocks as opposed to three.

Why do these common practices fail the “diversification” test? It fails because real diversification is owning thousands of stocks, not dozens or even a hundred. Furthermore, true diversification is owning thousands of positions even in non-stock investments, such as fixed income and real estate. Simply, it’s owning the whole market, like an index fund does, and owning the correct mix of asset classes. Studies have proven that 91% of investment performance comes from proper asset allocation. Not from choosing Apple or Microsoft or Home Depot or Lowes. The data also proves that a mechanical, rules-based process of asset class selection outperforms emotional, fundamental “gambling”.

So, why bother? Well, first and foremost, diversification greatly reduces the risk of a single company going under. If you own a lot of one company, probably the company at which you work or a single firm you admire because of its products or its charismatic CEO, well, YOU are taking on quite a lot of risk. Companies do fail. CEOs are often overvalued investors, who buy into the myth of their power over the market. Things do go wrong, and it can quickly take your retirement down. But diversification also protects you from yourself. Sorry to call your ego out here, but human nature crashes many retirement dreams. If you own 5,000 companies in a broad ETF, allocating to a pre-determined asset class, it won’t matter if 10 companies fail or even if 100 fail. The successes of some other group within that asset class will more than compensate.

Likewise, you shouldn’t own two pages of mutual funds on the assumption that a variety of managers will protect you from problems, or the next market correction. I recently was reviewing a portfolio from a well know advisory firm. The big brokerage firm you see in every local strip mall, between Little Caesar’s Pizza and the Nail Salon. The statement was easy to read and showed a list of over 25 mutual funds. The problem: when the funds selected are all trying to beat the same benchmark, you haven’t diversified at all. That portfolio overlap and redundancy is an express route to major retirement failure. In addition, the client was paying their high shopping center rent via hidden fees and a cookie cutter approach to investment management.

Owning all those mutual funds and then spritzing in one or two ETFs isn’t the answer either. Buying an index fund or index style ETF with a small slice of your portfolio is just lipstick on a pig. It may make you feel better about the big risk and big fees you are paying.

True Diversification

So, what is it? It is about owning whole markets (classes) through broad index funds or ETFs. And it’s owning the proper mix of those funds across multiple asset classes, including stocks, fixed income, real estate, foreign investments and commodities. It is rebalancing dutifully among those funds as the markets gyrate up and down with opportunities to sell high and buy low. That way, you stay diversified even as changes in the market distort your original portfolio allocations.

It’s really simple, perhaps 10 or 12 index funds across six or eight asset classes. That is top-notch diversification and, ultimately, better performance. If you would like more information on how we build client portfolios and protect them with AssetLock, call our office today. 678-218-5925.

In meeting with folks every week, I can state with quite certainty that few individual investors truly understand what it means to have a diversified portfolio. Most believe that owning 20-50 stocks, or a few mutual funds, means that they are diversified. But they are dead wrong. “Dead” because without being properly diversified, in extreme market situations, a portfolio can permanently lose capital and never recover. This problem will only reveal itself when the market experiences increased volatility and is in the grasp of a bear market cycle. (So, you feel pretty diversified right now because the market is flying high.)

Those who owned a “diversified” portfolio of technology stocks in early 2000 when the Nasdaq reach 5000, have never recovered. Neither have those who held a “diversified” portfolio of financial stocks going into 2008.

Proper diversification is about managing risk — making sure that when the markets are down, you lose as little as possible, and when they are up, that you recover and capture your fair share of returns. Being well diversified is the “only free lunch” in finance because using methods from proven and scientific knowledge about investing, you can dramatically lower risk without suffering a reduction in returns … and it really is free!

Just like following a prized recipe, the ingredients of diversification are simple to acquire, but rarely followed. Here are three tests to make sure you have a truly diversified portfolio.

Asset Classes. A well-diversified portfolio is not about US stocks — it includes at least six asset classes. You should have at least 5% of your portfolio—but no more than 30% — in all six core asset classes: U.S. and foreign developed countries (Europe, Japan, Asia), emerging-market countries (Brazil, Russia, India China) bonds, real estate and commodities.

Like each instrument in a symphony orchestra, each one of these asset classes plays a valuable role in different economic circumstances. US Treasury bonds protect against economic meltdowns like the one experienced in 2008, but they lose value from inflation and slow down overall portfolio growth. Real estate hedges against inflation, provides a steady income stream, and can appreciate like stocks, but it is not immune to economic cycles. How much to invest in each asset class differs depending upon your stage in life — but everyone should have all six. A retiree seeking income, may have 80% of his portfolio in bonds, but also own global equities as an inflation hedge.

The term asset class is widely misunderstood. Industries and sectors are not asset classes. Economic sectors (technology, utilities, financials, basic materials, or consumer durables) are not asset classes. Nor are the industries within a sector. The software, communication equipment and computer hardware industries are within the technology sector. For U.S. investors, foreign countries are not asset classes.

Number of Securities. Within each asset class, diversified means you must own hundreds of stocks or bonds to reap the returns of that asset class. You do not want any individual company or country (besides the U.S.) to have an impact on your portfolio. A typical MarketRiders portfolio includes over 6000 stocks and 3000 bonds.

For example, if you want exposure to emerging markets, owning 20 stocks from a few different countries won’t do it. Owning a China fund like iShares FTSE China 25 Index Fund (FXI) is not enough diversification. But Vanguard’s Emerging Markets ETF (VWO) allows you to own over 900 companies in 28 countries, giving you fantastic diversified exposure. You are riding entire economies of many countries without worrying about getting hurt by an individual business within them. Sure, you’ll miss the joyride you get owning an Apple (AAPL), but you will also miss the dread when a company like Citibank (C) loses 80% of it’s value.

Funds, Not Stocks. It is nearly impossible to be well diversified owning individual stocks. Trading costs and the software required to own the necessary number of stocks required are beyond the reach of individual investors. So you must own funds.

Actively managed mutual funds have wide discretion in how they can invest. Most funds can invest 10%-25% outside of their “advertised” charter. You could invest in a Foreign Developed country fund and find that a large percentage of your investment is in the U.S. You can’t manage your allocation when your managers don’t have to stick to their charter. It would be like having your guitar player suddenly decide to start playing a flute.

Owning ETFs gives you razor-sharp precision in your allocations. If you own, for example, the iShares Small Cap US Stock ETF (IJR) you won’t find foreign stocks in that holding. And ETFs are dirt cheap — our portfolios are built solely with ETFs and have an average expense ratio of .2% which is an average of 80% less than a mutual fund portfolio. Cheap and precise … how do you beat that?

Look under the hood of your portfolio. Do you own over 10,000 securities? Are your funds overlapping, giving you double or triple ownership in the same stocks? Is your money spread all over the world, in all sectors, all industries, and in all kinds of debt? If not, you are missing that free lunch, and during the market correction and next recession, you will feel it way more than those of us who have taken true diversification to heart.

If you are serious about your money, we are serious about helping you reach your goals. Please contact our office NOW and allow us to help you get truly diversified. If you have any doubt, give us a shout!

The market has largely just been moving along the past few months. That all changed with last week’s huge drop. The market drops 400 points in 2 days. Despite the sharp selloff, it may be too early to worry about a major correction. However, pay close attention to market action over the next week or two. Below you’ll find thoughts from the Chief Investment Strategist at Formula Folios. Formula Folios is our lead institutional money manager and they don’t think now is any time to panic.

As always, if you have comments or questions, feel more than welcome to reach out. You can use the comment feature below the post for public questions, or drop a secure and direct message to me via the contact form here.

Oh, and be sure to share this to help other people that might be worried about the recent market dip. Just use the Facebook, Twitter, or other share buttons to the left of the blog title.

After a slow start to the year, the second quarter of 2014 may be a redemption story. Multiple indices reached new records and the S&P 500 logged its longest quarterly rally since 1998.[i] For the quarter, the S&P 500 gained 4.66%, the Dow grew 2.56%, and the Nasdaq gained 4.46%.[ii]

What are some of the factors that contributed to strong market performance in Q2?

Economic fundamentals were solid. Despite some gloomy first quarter Gross Domestic Product (GDP) results showing the economy contracted 2.9%, it appears that underlying fundamentals are returning to trend following the chilly winter. Retail and vehicle sales grew as consumers unlimbered their wallets.[iii] Manufacturing also picked up significantly after the winter slowdown, supporting the belief that the sector, which contributes 12.5% to GDP, is rebounding strongly. [iv]

The employment picture is much brighter. The labor market hit an important psychological milestone by regaining all of the 8.7 million jobs lost in the recession. [v]While demographic shifts and labor market growth mean that we haven’t yet hit full employment, job growth could be picking up speed. The June employment situation report showed the economy created 288,000 new jobs and the unemployment rate dropped to 6.1%.[vi] All told, roughly 800,000 new jobs were created last quarter, which is great news.[vii]

The Federal Reserve has continued to express optimism about the economic recovery and is committed to wrapping up quantitative easing programs by this Fall.[viii]Much of the bull market we’ve seen for the last couple of years can be attributed to the Fed’s easy money policies and its commitment to supporting economic growth. Now that the country is finally on better footing, investors are taking comfort from the Fed’s readiness to take the training wheels off the economy and return to normal monetary policy.

What could act as headwinds in the weeks and months to come?

Geopolitical issues are on the radar as the security situation continues to deteriorate in Iraq and the crisis in Ukraine still simmers. Ukraine and Iraq play key roles in the natural gas and oil industries, respectively, and supply disruptions – or even just the threat of disruptions – could drive up prices and make investors skittish.

Rising food and energy prices may start to be felt in consumer spending.[ix] If Americans are taking hits to their pocketbooks, they may be less willing to spend, which could drag on the economy and financial markets.

Investor optimism is also very high, which can sometimes presage a market pullback as investors take profits and wait for better news. After flirting with the top for days, the Dow finally broke 17,000 last week for the first time in its 118-year history.[x] Though we don’t put a lot of faith in technical indicators, 17,000 is a big psychological number and investors may become more cautious on the other side.

What does this mean for future market performance? Hard to say. Economic fundamentals going into the third quarter are strong, and if the earnings picture is bright, stocks could see some further upside. However, we can expect more volatility and possibly even a correction in the months to come. As always, it’s important to stay focused on long-term goals instead of short-term market performance.

Data as of 7/3/2014

1-Week

Since 1/1/14

1-Year

5-Year

10-Year

Standard & Poor’s 500

1.25%

7.42%

22.91%

24.30%

7.64%

DOW

1.28%

2.97%

13.88%

21.22%

6.60%

NASDAQ

2.00%

7.41%

30.27%

29.94%

12.36%

U.S. Corporate Bond Index

-0.90%

2.61%

2.73%

3.17%

1.12%

International

1.33%

3.16%

20.24%

13.92%

8.15%

Data as 7/3/2014

1 mo.

6 mo.

1 yr.

5 yr.

10 yr.

Treasury Yields (CMT)

0.01%

0.06%

0.11%

1.74%

2.65%

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

Vehicle sales accelerate in June. Sales of automobiles spiked unexpectedly last month, reaching an annualized rate of 16.98 million units. This is good news for the economy because it indicates that consumers are willing to purchase big-ticket items.[xi]

June manufacturing jumps. June was a very strong month for manufacturing as domestic demand caused new orders to spike. Foreign demand for U.S. goods barely changed, indicating that global demand is still suffering.[xii]

ECB unlikely to buy bonds. While the European Central Bank has committed to quantitative easing to boost stagnant growth in Europe, the organization will likely stop short of taking on the Federal Reserve-style bond purchases.[xiii]

IMF hints at global forecast cut. The International Monetary Fund may cut its global economic growth forecast, citing weak public and private sector demand. Weak global growth could spell trouble for U.S. firms who rely on exports for revenue.[xiv]

As I mentioned in a previous post, we are excited to be now working with one of the premier Registered Investment Advisory firms in the country. FormulaFolios provides are clients with first class portfolio management, a historical record that is envious, and a process that is just plain smart.

Each decision our portfolios make is based on proven, academic research. We’ve structured three specific processes to enhance your experience:

1. Customized Asset Allocation

We start with a smart process for determining the unique portfolio each client should use to best achieve his or her unique goals. We listen, take notes and follow a structured process to establish this fully customized asset-allocation plan.

Asset Allocation is driven by:

Your current and future portfolio income needs

Your comfort with taking short, intermediate and long-term risk

The unique tax situation and nature of managed accounts

2. Money Manager Selection

When choosing money managers for each component of a Custom Asset Allocation, we are very careful in only using proven, top-ranked, and institutional asset managers.

We only use money managers who exclusively utilize a formula-based approach to a asset management, similar to our formula-based approach to building a custom portfolio. This is different than hiring money managers based on past returns; as they are impossible to quantify and could be entirely based on luck. By focusing only on managers who utilize mechanical investment models, we are confident their future decisions will be based on the same factors as those made to produce their outstanding track records.

Large institutional investors , such as University Endowments, Pension Plans, and Charitable Funds, have utilized this approach for years. We believe allowing individual investors this same access to world-class managers in a Custom Asset Allocation, driven by proven formula-based and emotion-free processes, is the smart approach many have been missing (but wished for) for years.

3. Tactical, Ongoing Asset Management

While we believe in the merits of active asset management, there are many who abuse this philosophy, turning into hyperactive and costly mistakes. Our formula-based process is designed to only create transactions when appropriate.

By adhering to these principles, we seek to hold investments for prolonged time periods when markets are healthy and gains most likely. However, when market cycles change and it is most prudent to move to safe-haven assets, our models do not hesitate to proactively reallocate funds away from harm.

The end result is a portfolio that is consistent and capable of producing long-term results in line with client expectations, while also avoiding large-scale losses that often take many year to recover from.

We believe with FormulaFolios, you now have a smarter way to invest, and with AssetLock, you now have help protecting what you worked so hard to accumulate. You owe it to yourself to learn more about this sound investment process.

The last of the baby boomer generation will be turning 50 this year, and it’s time for them to get a fix on how they are going to prepare for retirement. Fortunately, there are valuable lessons to be learned from those who have already reached their later years. It is upon each American to avoid retirement pitfalls that cause regrets.

According to a leading accounting firm and Lisa Barron at Retirement Advisor Magazine, these are the biggest boomer retirement regrets they see.

1. Lack of savings and an unrealistic understanding of how much will be needed in retirement

2. Failure to have a tax plan, an income plan and an investment plan

3. Failure to use a tax-forward plan, such as deferring Social Security

4. Withdrawing money from tax-deferred IRAs too early

5. Not spreading Roth IRA conversions over a period of time

6. Failure to hedge against inflation and use a tax co-efficient

7. Excessive borrowing

8. Retiring too early and underestimation life expectancy

9. Not planning for long-term healthcare expenses

I’m sure other regrets could be added. So, how about you, is it time to get professional guidance to help you prevent these same regrets?

Look… the stock market crash of 2008 was a game-changer for the psyche of many boomers. Many of our the clients and potential clients we see have had to shift from focusing on how much they make to how much they keep. Many folks spend their time looking at how they can get the maximum rate of return, whereas, what they should be focused on is a strategy that gives them guaranteed income month over month without having to worry about the risk that’s associated keeping a large portion of their portfolio in the markets. Let me be clear, there are many ways to accomplish your best retirement. Stop being closed minded and open your potential.

President Obama’s 2015 budget includes a number of proposed changes aimed at retirement accounts. Six out of the seven provisions (or similar versions of them) are detailed below and unveiled Monday of this week.

It’s important to know the key retirement account provisions included in the President’s budget this year, because they certainly could happen and, at the very least, they are an indication as to where the administration wants to head. Here are the key changes you should know about:

‘HARMONIZE’ ROTH IRA RMD RULES WITH OTHER RETIREMENT ACCOUNTS

This is major deal and when people catch on to it, it’s bound to make some major waves. Under the premise of simplifying the tax rules for retirement accounts, President Obama’s 2015 budget calls for a provision that would require Roth IRAs to follow the same required minimum distribution (RMD) rules as other retirement accounts.

In other words, you would have to begin taking RMDs from your Roth IRA when you turn 70 1Ž2, the same way you do with your traditional IRA and other retirement accounts. If this were to come to pass, it would be a major game-changer when it comes to retirement planning.

The fact that Roth IRAs have no RMDs is one of the key reasons many people decide to contribute or convert to Roth IRAs in the first place. The distribution would be a tax-fee withdrawal, however, once the money is out of the tax-free haven, where would it go. Either, the money would be spent or re-invested in a less tax advantaged location.

If this proposal were to become law, conversions would make sense for far fewer people. Not only that, this proposal gives all those who haven’t made Roth conversions over the years because they “don’t trust the government to keep their word” more ammunition.

MAXIMUM BENEFIT FOR RETIREMENT ACCOUNT CONTRIBUTIONS

The maximum tax benefit (deduction) for making contributions to defined contribution retirement plans, such as IRAs and 401(k)s, would be limited to 28%. As a result, certain high-income taxpayers making contributions to retirement accounts would not receive a full tax deduction for amounts contributed or deferred.

Example: Currently, if an individual with $500,000 of taxable income defers $10,000 into a 401(k), they will not pay any federal income tax on that $10,000. Without that salary deferral, that income would be taxed at 39.6% (currently the highest federal income tax rate).

However, if this proposal were to become effective, that $10,000 would effectively be taxed at 11.6% (39.6%-28% = 11.6%), since the maximum tax benefit that a client could receive would be limited to 28%. That equates to an additional tax bill of more than $1,000.

MANDATORY 5-YEAR RULE FOR NON-SPOUSE BENEFICIARIES

Most IRA (and other retirement plan) non-spouse beneficiaries would be required to empty inherited retirement accounts by the end of the fifth year after the year of the IRA owner’s death (known as the 5-year-rule). The proposal does call for certain exceptions to this rule, such as for disabled beneficiaries and a child who has not yet reached the age of majority.

While this proposal might simplify the required minimum distribution (RMD) rules for most beneficiaries, it would mark the death of the “stretch IRA.” Most non-spouse beneficiaries would face more severe tax consequences upon inheriting retirement accounts and as such, the value of these accounts as potential estate planning vehicles would be diminished.

RETIREMENT SAVINGS ‘CAP’ PROHIBITING ADDITIONAL CONTRIBUTIONS

New contributions to tax-favored retirement accounts, such as IRAs and 401(k)s, would be prohibited once you’ve exceeded an established “cap.” This cap would be determined by calculating the lump-sum payment that would be required to produce a joint and 100% survivor annuity of $210,000 starting when your turn 62.

At the present time, this formula produces a cap of $3.2 million. If you ended up with more than this total in cumulative retirement accounts at the end of a year, you would be prohibited from contributing new dollars to any retirement accounts in the following year. The cap would be increased for inflation.

RMD ELIMINATION IF RETIREMENT ACCOUNTS TOTAL $100,000 OR LESS

This one’s simple. If you have $100,000 or less – across all of your retirement plans combined – you would be exempt from required minimum distributions. Currently, if you fail to take the proper RMD amount comes with one of the stiffest retirement account penalties there is, a 50% penalty on any shortfall.

This proposal would eliminate that possibility if you have $100,000 or less in retirement accounts and would allow you to take as much, or as little, as you want without a penalty.

INHERITED ASSETS: ALLOW 60-DAY ROLLOVERS FOR NON-SPOUSE BENEFICIARIES

Non-spouse beneficiaries would be allowed to move inherited retirement savings from one inherited retirement account to another inherited retirement account via a 60-day rollover (in a manner similar to which they can currently move their own retirement savings).

Unifying the rollover rules for retirement account owners and beneficiaries would greatly simplify this aspect of retirement accounts and reduce the number of irrevocable and costly mistakes that are often made by beneficiaries under the current rules.

MANDATORY IRA AUTO-ENROLLMENT FOR SMALL BUSINESSES

Employers in business for at least two years that have more than 10 employees and don’t offer another retirement plan already would be required to offer auto-enrollment IRAs to their employees. Contributions to employees’ IRAs would be made on a payroll-deduction basis.

Employees would be able to elect how much of their salary they wish to contribute to their IRA (up to the annual IRA contribution limit), including opting out entirely. In the absence of any election, 3% of an employee’s salary would be contributed to their IRA. Employees would be able to choose whether to contribute to an IRA or Roth IRA, with the Roth being the default option.

The provision would also enhance incentives, in the form of a tax credit for small businesses, to adopt a company-sponsored retirement plan.

If you have questions on how this may affect your specific situation, give our office a call. If you are not our client and feel like it is time to get a second opinion or professional guidance give our office a call.

This originally appeared on www.theslottreport.com. Information and examples by Jeffrey Levine, CPA.

Do not drive to your local Social Security office until you have educated yourself. That is the best advice I can give to all you baby boomers heading towards retirement. There is a large crater between what most Americans think they know about Social Security and the real rules governing this entitlement program. Multiple surveys and an untold number of stores reveals this fact.

As a result of this lack of knowledge and people not getting professional guidance, the typical retiree will walk right past up to $100,000 in lifetime retirement benefits.

For a married couple, the difference between a smart Social Security claiming strategy and the urge to “take the money and run” could be $250,000 or more over their combined lifetimes. Social Security is the cornerstone of retirement income for most Americans. So why are so many people not doing their homework before going to the social security office?

Last year Financial Engines conducted a survey of more than 1,000 people who are retired or close to retirement . The repsondents were asked eight basic questions about claiming Social Security benefits. Of those people who had not yet claimed their benefits, 74% scored a grade of C or lower. Only 5% were able to answer all eight questions correctly. This survey shows that this retirement decision is more complex than most Americans think. As a financial professional, I can assure you that this decision will have a dramatic impact on the standard of living most people enjoy in this new chapter of life.

The Financial Engines survey found that 70% of people who hadn’t yet claimed Social Security said they would be at least somewhat interested in a professional service to help hem develop a claiming strategy. And, 39% said they would be extremely or very interested in this type of Social Security-claiming help. Who is going to provide that assistance, the Social Security Administration? A financial advisor is best suited to help you understand how to put the pieces of a retirement income plan together. Those pieces should include Social Security, retirement savings, pensions (if you are one of the fortunate few) and for some people continued work in retirement. In the current economic environment, some may be better off by tapping their retirement accounts in order to delay Social Security as long as possible. That is probably not what most Wall Street brokers would like to see happen to that IRA.

A financial advisor may be able to improve a client’s investment return by 1-2% with good asset allocation and diversification, but guiding clients to a better claiming decision as it relates to Social Security could increase their lifetime income by 25% or more. Although we can claim benefits as early as 62, your payment will be reduced forever and you will be subject to earnings caps if you continue to work and you will forfeit the ability to engage in creative claiming strategies that could boost your lifetime income.

Many retirees do not understand what a file and suspend, or restricted application could do for them. Nor do they understand the spousal benefit strategies and how they work.

DISCLOSURE: Investment Advisory Services offered through Calandra Wealth Management, LLC. (CWM) A Georgia Registered Investment Advisor. Investment Advisory Services offered through Retirement Wealth Advisors, (RWA) a Registered Investment Advisor. Calandra Wealth Management, LLC. and RWA are not affiliated. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision. Insurance products offered through Phillip A. Calandra, GA License #690594. Annuity guarantees rely on the financial strength and claims-paying ability of the issuing insurer. Any comments regarding safe and secure investments, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way to securities or investment advisory products. Fixed Insurance and Annuity product guarantees are subject to the claims‐paying ability of the issuing company and are not offered by Retirement Wealth Advisors. AssetLock™ is a portfolio monitoring system, which identifies a client’s maximum portfolio downside or loss and indicates that immediate action is required in order to limit losses per the clients pre-determined risk tolerance. It is not an actual stop loss, and may not automatically sell the individual securities in the portfolio. Therefore, the AssetLock™ Value is a reference point to encourage a conversation between Calandra Wealth Management, LLC. and the client, and to determine if the client/s would like to liquidate the portfolio and move the assets into cash, reset the AssetLock™ percentage, or reallocate to a different risk profile. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. Past performance is no guarantee of future results.